The South Carolina Medicaid agency improperly paid an estimated $490 million because of errors that include approving applicants who might not have been eligible for coverage, according to a federal audit released Friday.

An estimated 10.7 percent of South Carolinians the state approved for Medicaid, the government health insurance program for the poor and disabled, submitted applications that were ineligible or had insufficient documentation, according to the audit for the fiscal year that ended in September 2010.

That is an improvement from the fiscal 2007 report, when an estimated 19.2 percent of residents improperly were approved, the S.C. Department of Health and Human Services said in a release.

The federal audit, conducted every three years, is based on a review of 500 Medicaid applications. The department processes more than 459,000 new applicants annually.

South Carolina's error rate due to eligibility issues is more than four times the national average, according to the department.

Eligibility errors were not the only problem auditors detected. The state Medicaid agency, which receives a federal 3-to-1 dollar match, must reimburse the federal government a maximum of about $129,000 in overpayments due to coding errors with hospitals and behavioral health providers, S.C. Medicaid Director Tony Keck said. But the state will not face other penalties as a result of the audit, department spokesman Jeff Stensland said.

Keck said the eligibility errors stemmed primarily from a "failure to follow procedures," but "beneficiary fraud and worker collusion cannot be ruled out."

The department's Program Integrity Unit is investigating possible fraud, the department release states. The agency sent the audit report to state Inspector General Jim Martin.

Keck, who became director last year, called the eligibility errors a "ghost of the past." The prior administration failed to "faithfully and consistently follow the state's eligibility guidelines," he said in a statement.

"The results of this year-long federal audit confirm what we knew about our eligibility and enrollment system we inherited -- it delivers uneven service to Medicaid beneficiaries, doesn't reach all those truly in need and does a poor job of ensuring accountability for taxpayer dollars," Keck said.

Keck said his department has taken steps to reduce errors. The U.S. Centers for Medicare & Medicaid Services require the state to submit a "corrective action plan" by mid-February, Stensland said.

To reduce errors, the state plans to automate its paper-based system; perform random eligibility audits monthly; tie employee evaluations to error rates and productivity; and request additional state funding for investigating fraud.